Frankfurt The trend seems clear: aviation managers agree that flying is becoming more expensive. Lufthansa CFO Remco Steenbergen recently announced rising ticket prices. Ed Bastian, CEO of Delta Airlines from the USA, also expects that flying will become up to ten percent more expensive due to the sharp rise in oil prices. Even Eddie Wilson, head of the low-cost brand Ryanair, assumes that tickets will be more expensive.
The facts do not allow any other conclusion. Since Russia invaded Ukraine, the price of crude oil has risen significantly. The fuel bill is usually the second largest cost item for an airline. In the medium term, there will also be ever stricter climate regulations, such as the addition of significantly more expensive synthetic kerosene. The prices for flight tickets are likely to rise on average.
But the good news for passengers: unlike at the petrol stations, there will probably be no price shock. “The prices for flight tickets will only rise with some delay,” says Gerald Wissel of Airborne Consulting, a consultancy specializing in aviation. “In the summer, the passengers will probably not feel anything here, but maybe in the fall.”
Stefan Schulte, head of the airport operator Fraport, recently made the following calculation: up to 50 euros more could be due on short-haul routes and up to 150 euros more on long-haul routes.
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Even these manageable additional costs are not certain. Because price increases are difficult to enforce in aviation. As in all industries, the principle of supply and demand applies to flight tickets. But consultant Wissel restricts: “There are currently a number of variables that are difficult to assess.”
Airlines put a lot of offers on the market
First on the supply side: The airlines are slowly ramping up their capacity again. At the same time, the desire to travel is great after two years of being restricted. Supply and demand could actually balance each other out. But in aviation, the airlines are always concerned with exploiting the weaknesses of others and gaining market share in the short term. Whoever is number one or two at an airport can determine the prices. Even the third-place winner has to submit to their price dictates.
Low-cost providers in particular, such as the Hungarian Wizz Air or the Irish Ryanair, have therefore declared that they will massively expand their offers in the coming months, in some cases even beyond the pre-crisis level. Ryanair Holdings boss Michael O’Leary explained the strategy at the end of last year only if demand was cheap.
>> Read about this: German aviation companies are left behind by the war
“Budget carriers like Ryanair will continue to try to offer cheap fares. And they can do that better than the established airlines,” says consultant Wissel. “Because they fly modern and very efficient aircraft. They are less affected by higher kerosene prices.”
This strategy is also fueled by the usual business model in aviation, of having to pay for tickets immediately when booking, not just when boarding the flight. This tempts airlines to bring a lot of capacity onto the market. They can use the short-term cash flow for their balance sheets, which are ailing due to the pandemic.
For Lufthansa, which is actually powerful in the German home market, this means less freedom in pricing – even if the management does not participate in the radical price wars of some rivals. The company will monitor the competition closely and make appropriate adjustments if necessary, according to the group’s headquarters at Frankfurt Airport.
The “Hansa” has some leeway in terms of prices, because the high fuel prices are not yet fully felt by it. For the current year, management has capped the price of oil for 63 percent of its needs through hedging, at $74 a barrel. However, if the oil price remains at its current level for too long, it will also be expensive for Europe’s largest airline group. In the coming year, only 25 percent of the calculated requirement is secured in terms of price.
No one can currently predict how long kerosene will remain expensive. “The further development of the oil price depends on how long the Ukraine conflict and the war last,” says consultant Wissel. Should there be a pacification, the question is how long the sanctions against Russia would be maintained.
War fuels insecurity among passengers
The recent strong increase in flight bookings could also ebb away. Because the war fueled a development that didn’t exist for a long time: prices keep rising. “An important factor is inflation. As a result, customers’ travel budgets are shrinking. Lower and middle incomes are likely to be affected first,” says Wissel.
The question is how potential aviation customers deal with this situation. For example, you could switch from Lufthansa to Ryanair. However: “Here, customer loyalty programs such as Miles and More could prevent a strong migration,” believes consultant Wissel. In addition, it is more the lower-income customer groups who use low-cost providers for their trips. If they can now afford fewer trips, it would hit Ryanair in particular.
Recovery during business trips is also at risk. “Many forecasts are shaky because of the war. It’s time to save again. That could affect companies like Lufthansa,” warns Wissel.
People are changing their travel behavior because of the war, although not dramatically so far. This is shown by data from the world airline association IATA. In the week beginning February 24, the day Russia invaded Ukraine, global bookings fell 8 percent. In Europe, the minus was even 14 percent.
So there is a lot to be said for a scenario: the airline managers are counting on their business finally recovering after more than two years of the pandemic and are expanding their offerings significantly. However, potential customers are more cautious than expected because of the burden. The resulting oversupply would only allow the airlines to push through higher ticket prices to a limited extent.
The intensely competitive market will hardly allow large price jumps.
More: Why Klaus-Michael Kühne is joining Lufthansa as a major shareholder